Correlations

Synchronized trading

Oil to dollar

Oil to EUR/USD

2 year study

I’ve done two studies of the major pivot points in oil since the 2014 breakdown.

In one study, I’m detailing key events on charts comparing oil to the movement of the Euro USD chart.

And in the other study, I’m comparing oil to the movements of the US dollar.

The goal of these studies is not just to prove the point of correlation, but to develop tradable information.

It’s clear that the major waves are correlated, and often even micro waves are correlated. Was any of this predictable? And more important, going forward, can we imagine future waves based on historical studies like these?

Since the Euro is over 50% of the dollar basket, the waves in the EUR/USD chart are almost perfectly inverse to the USD chart. And therefore, the EUR/USD chart (in which the EUR gets weaker, as the dollar gets stronger) is almost a mirror of the oil chart.

This chart starts in the summer of 2014. The US is tapering its money printing program, and the European Union has just introduced negative rates, in June.

A slow slide in the value of the EURO, and the cost of oil, proceeds through the summer. But in spite of the arc type patterns, the Euro and oil are still in a high range that has lasted for years.

10-28-14

The breakdown from a key level, out of this upper range, is timed almost precisely with the moment the US Fed ceased printing money.

(Note, I have not even put a line on this chart, for the Saudi announcement. That news was the supposed reason for the breakdown in oil. It was the sharp move at Thanksgiving 2014.

But in this chart, it’s clear that the key break has already happened 1 month before, when the fed ended QE.

1-26-15

The first bounce in the Euro….oil follows a few days later.

3-4-15

ECB starts printing money in Europe. This is the exact date when the Euro find equilibrium against the dollar. It bounces to set up the long sideways action. Oil bounces 4 days later.

It’s interesting that the Euro slide stops here, at the moment when QE starts, which should theoretically weaken the Euro. Instead, the opposite.

Maybe it was one of those “sell the rumor” type things. Maybe if you were following the market, it was rumored that the EU was planning to start QE. It was certainly known ahead of time when the US was going to stop QE.

April 2015

The Euro moves up sharply against the dollar. Oil follows. The synchronization continues.

6-23-15

The Euro breaks down a week before oil starts to meander down.

August 2015

The correlation breaks. The Euro rallies, while oil makes a sharp break down. It will be interesting to compare this phase in the Dollar only chart.

ECB extends QE. Again, the market reacts the opposite of seeming logic. The Euro bounces, while oil continues to slide for 2 more months.

2-10-16

Still out of sync. The Euro starts to fall, oil begins a major rally.

As we’ll see in the dollar chart, this rally is well coordinated with the dollar.

But it’s also interesting to note how every time the ECB announces more money printing, the Euro gets stronger, contrary to logic.

5-10-16

The sync starts to resume. The Euro starts to slide, oil follows a month later.

7-27

The Euro starts up from a bottom, oil follows a few days later, on 8-3.

Now for the Oil V $ comp

This is really the more important chart, since the oil is valued in dollars, and the dollar value take in to account not only Euro value, but the yen, pound, etc.

10-29-14

Again, the big news here was the end of QE.

Keep in mind, US QE still dwarfs EU QE.

1-30-15

I didn’t annotate that level on the dollar chart, but you can see that when oil bounced, the dollar topped for 3 months, before making its final run.

3-17

The dollar had topped for a few days, then staged an impressive breakdown on 3-17. Oil found a bottom 3 days later, and started to tentatively wander up.

4-10

The dollar attempted up one more time, then began to fail in earnest. 4-14 was the noteworthy failure date in the dollar, which was precisely synced with a pop in oil.

Summer 2015

This is the unsynchronized phase. Both oil and the dollar are topping.

Actually, comparing all three charts, oil, the Euro and the dollar went in to balance in this period. Nothing was trending.

Everything was settling in to a range.

7-2

Oil was the first to break the pattern. It staged a major breakdown on its own at this time. It was not lead by any currency move.

8-7 to 8-24

The dollar started down on 8-7, and made a sharp move down on 8-17. Then made a bottoming tail 8-24 that established a range bottom

8-24 to 10-15

The dollar made 3 attempts to break lower through the fall of 2015. At the same time, oil looked like it was a bull flag, and it might break to the upside.

10-9

Oil staged an attempted breakout, and failed. It still could be a breakout/retest, if the dollar really was going to breakdown.

10-22

The dollar made a large move up. I wonder what the news was. One day later, oil failed through the re-test level. The bull flag was a failure at that point.

12-3-15 to 2-10-16

The dollar finds a top and shows first sign of failure, again on news of ECB extending QE, on 12-3-15.

Oil accelerates its long down trend from Dec-Feb, pushing many significant bottoms, and in to very oversold conditions.

This sets up the resumption of synchronization.

2-3-16

The dollar makes a major down move. A week later, oil finds a major bottom.

5-3-16

The dollar finds its range bottom, leaves a bottoming tail. Oil fins its top a month later.

5-3 to 6-24

The dollar tries 3 more times to break down, and finally rockets up on 6-24. Oil at the same time begins more significant liquidation.

Summary and next studies

Clearly, the major waves and pivots correlate between currencies, oil, and probably many other commodities.

Sometimes when the products go sideways, and balance for a long time, the correlations can get weaker, and even unsynchronized at times.

None of these correlations are tradable without other reasons to believe in certain levels. Nothing always leads the other thing, or by a specified amount of time.

Next suggested studies are to zoom in on a shorter time frame, see how correlations work from day to day, and also think about likely political reasons that might drive currency correlations.

The Euro and Dollar have been in a balance area for almost 2 years. Balance leads to imbalance. At some point, there will be another dramatic move. If that move can be recognized in time, it could make for good larger time frame swing trades.